Francois Hollande will travel to Berlin with leaders for crisis talks on Tuesday after Germany said a Greek sovereign debt restructuring was “out of the question”.

On Monday, the French president met with Jim Yong Kim, head of the World Bank, and IMF chief Christine Lagarde, as well as leaders of the World Trade Organisation and the OECD, to discuss solutions for Greece, including a debt buy-back. The group will talk about the ideas with Ms Merkel on Tuesday.

European markets dropped ahead of the pivotal talks amid worsening bank problems gripped both Greece and Spain. Greek banks plunged almost 16pc after the finance ministry in Athens said that Brussels’ bail-out fund would not recapitalise the banks. The collapsed dragged the Athens exchange down 6.3pc.

In Spain banks were told that a swingeing discount of as much as 63.1pc would be applied to property assets transferred into FROB, the national “bad bank”. The Bank of Spain said toxic property loans would be transferred from the banks at an average discount of 45.6pc with foreclosed loans taking a 63.1pc cut. The scheme, which is expected to start at the end of November, said it would have capacity to absorb €90bn of assets and would first take on €45bn assets from the nationalised banks.

Mario Monti, Italy’s prime minister, said he would work with Spain’s Mariano Rajoy to achieve stability.

Eurozone leaders fear that another crisis in Greece could destablise the Madrid’s fragile efforts to clean up its banks and shore up its finances.

Jean Claude Juncker, head of the eurogroup of finance ministers, said that leaders would speak three times over the next two weeks to establish a rescue plan for Greece. Over the weekend, a leaked draft of the latest inspection of Greece’s finances by the troika called for eurozone governments to accept losses on their Greek bonds. The report said the haircut was vital to enable Greece to reduce its debt to 120pc of GDP by 2020.

But on Monday Ms Merkel’s spokesman, Steffen Seibert, ruled out any restructuring, saying the haircuts would be illegal. He said: “German budget law, in article 39, says that credits can only be given when it is considered unlikely that there will be a default. We would be tying our own hands with such a measure and it would certainly not be in Greece’s interests.”

ECB policymaker Ewald Nowotny added: “From the ECB’s perspective, a debt waiver is not possible as that would correspond to indirect state financing. Hence, the ECB cannot take part in such an operation, which would quasi concern the public sector.”

Traders fretted that Greece was once again threatening a disorderly break-up of the euro. Mr Juncker said speculation about a Greek exit “had to stop” because “it won’t happen”.

A survey of finance directors by BDO found that Greece is seen as more risky than Syria as a place to invest. “Only Iran and Iraq are considered more risky than Greece, which also struggles to convince its international creditors that it deserves bailout loans to avoid bankruptcy and a possible euro exit,” the report said.